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DSW (DSW) updated investors on its fiscal 2012 second-quarter progress. The firm noted that earnings expansion looks weak as a result of increased pre-opening costs and an unfavorable product mix that leans more toward discounted and clearance items than full-priced items. Nevertheless, management reiterated its top-line same-store sales growth forecast of between 2 to 4% for the quarter, as well as the company's full-year earnings guidance of $3.25 to $3.40 per share (on a 3 to 5% increase in same-store-sales). We think the firm's shares are fairly valued at current levels, and we see no reason to change our long-term valuation of the firm in light of news.

With shares falling over 10% on Monday, we suspect investors are questioning the legitimacy of the company's full-year outlook. Although DSW is considered a designer destination (the name stands for Designer Shoe Warehouse), the DSW shopper may not be as resilient as high-end consumers at Nordstrom (JWN) or Saks (SKS). Yet, some of its peers like TJ Maxx (TJX) and Ross Stores (ROST) have yet to see a similar slowdown. Therefore, we think the margin warnings at DSW could signal some weakness in product mix or consumers seeking greater value in light of economic concerns. We saw similar results at The Men's Wearhouse's (MW) K&G where shoppers flocked to the store's value deals, rather than paying full price for other items.

Nevertheless, the news wasn't entirely negative. The board of directors authorized a $100 million share buyback program, as the company has a stockpile of about $370 million in cash. Additionally, the firm remains on track to open 35-40 stores during its fiscal 2012, suggesting management isn't too concerned about weakening consumer spending. DSW retains a clean balance sheet, with a favorable cash balance and no long-term debt. With an annual dividend yield of 1.4%, we don't view DSW as a very compelling income investment at this time. The firm registers a 6 on our DCF-based Valuentum Buying Index methodology (click here), so we'd wait for a significant pull back in the shares before getting excited about the shoe retailer.

Source: DSW's Second Quarter Might Not Be Great But Full-Year Outlook Remains